SAN JOSE -- In a case that outraged many in the community and cast a black eye on one of San Jose's oldest and largest Latino nonprofits, two former top officials of the Mexican American Community Services Agency will personally pay back -- with interest -- more than $110,000 they illegally diverted from employees who thought the money was going toward retirement funds.

As part of a deal reached with the Santa Clara County District Attorney's Office, former MACSA Chief Executive Olivia Soza Mendiola, 56, and ex-chief financial officer Benjamin Tan, 62, will give workers $170,000. They have three months to do so or face jail time, as part of their guilty pleas to grand theft charges on Friday.

While Mendiola's attorney Guerin Provini said the money was diverted in the interest of avoiding layoffs and saving programs at the nonprofit agency, prosecutors said some of the expenses included iPods, Jazzercise classes and meals at Chuck E. Cheese's as part of agency operating costs.

"They knew what they were doing," said prosecutor John Chase, who said the money was misused from 2004 to 2009. "They knew that instead of putting the money where it was supposed to go, they were using it for some fairly trivial things. It's pretty clear that's theft, especially when you're talking about money taken out of a paycheck."

But Provini said neither his client nor Tan believed they were doing anything dodgy at the time, but now acknowledge that by word of law it was illegal.

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"She is accepting full criminal responsibility, but under the understanding that she is admitting she participated in the use of those funds without the authorization of employees," he said. "And that type of diversion constitutes embezzlement."

He said the diversion was supposed to be temporary, and his client believed the funds would be replaced when MACSA sold some properties it owned.

However, Chase didn't buy that the defendants could be so oblivious.

"It seems obvious to me that when you put on employees' pay stubs that you are putting money into a retirement fund and claiming you made contributions that really haven't been done, for many years, I don't know how you can say you didn't know that was wrong," he said.

Provini said Mendiola and Tan were the subject of charges because they were ultimately responsible for the decision to divert the money, but other people at the organization had knowledge of what was going on.

"It's sort of a scapegoat thing," he said. "They were the only ones they could solidly put the finger on. They're on the hook."

Chase agreed.

"The word is 'responsible,' " he said. "Various people did learn it was going on at various times, some earlier than others. But it came down to who is making the decision."

According to the basis of the guilty plea filed with the court, "the diversion of employee funds was done with no intent to personally gain, with the knowledge of other persons and some board members at MACSA, and with the intent and expectation, based on proposals and plans to liquidate other MACSA assets, that MACSA would pay in full all deferred payments to the employees' retirement accounts."

While Friday's settlement takes care of the money that was not included in employee checks, the question of who is responsible for promised company matches remains undecided.

Chase said that amounts to $620,000 that should have been contributed, per union agreements.

Provini said he does not believe Mendiola and Tan should be responsible for that money.

"That was MACSA's collective bargaining agreement to pay those people," he said. "The board knew that, the plan was to make up for the money later. The point is they barely could keep their doors open. That was the deal, that was transparent. It's a breach of contract."

He said his client is "personally devastated" by the situation.

"In hindsight she feels really bad about it," Provini said. "But she really didn't have her finger on the pulse. ... It got out of control, and she wasn't really minding the ship very carefully."

MACSA is a nearly 50-year-old nonprofit that runs youth programs, elder care and low-cost housing programs. It also used to run two charter schools.

MACSA officials could not be reached for comment Friday night. But Jose Montes de Oca, who served as a consultant for MACSA last year to help come up with a plan to stabilize the financially struggling agency, said following the retirement fund fiasco there was a "snowball effect" that delayed the agency from meeting other obligations.

"Once they are able to stabilize all of that, they need to develop a remediation plan," he said. "A plan by which they can reinstitute the good name of MACSA."